Wall Street analysts continue to salivate over the possibility that Microsoft will acquire the U.S. operations of the video social network TikTok from China-based ByteDance.
Over the weekend, Microsoft (ticker: MSFT) confirmed that discussions had begun and that the company intends to wrap up negotiations by Sept. 15. CNBC is reporting that the deal could be for as much as $30 billion.
Morgan Stanley analyst Keith Weiss says in a research note that TikTok could be a good strategic fit for Microsoft, for a number of reasons. As other analysts have observed this week, TikTok’s population of more than 100 million U.S. users “could immediately make Microsoft a viable player in the consumer-oriented social media space,” positioning it to compete with Facebook (FB) and others, he says.
He also notes that there is potential for TikTok to yield more cash, saying it is “well under-monetized,” with average revenue per user of less than $5.
Weiss also sees potential synergies with existing Microsoft businesses, including advertising, gaming, commerce, and education. And he says shifting the service to the Microsoft Azure cloud platform could save money.
Importantly, Weiss says, Microsoft is likely the only company in position to buy TikTok given the regulatory scrutiny on large tech companies from Congress and others. “With political attention from the White House on TikTok’s U.S. operations, other large media vendors currently dealing with regulatory scrutiny and Microsoft holding over $136 billion in cash on the balance sheet, we see both a strong bargaining position and solid capability to get a potential deal done,” he says.
Weiss says media reports suggest TikTok will have about $1 billion in revenue in 2020, about half of that from the U.S. market, growing to $6 billion, with $3 billion in the U.S., in 2021. At that size, TikTok would boost Microsoft’s calendar 2021 revenue by about 2%, Weiss estimates.
The Morgan Stanley analyst notes that competitive risks are rising, with Facebook getting ready to launch a video feature called Instagram Reels, and Snap also reportedly testing a competitive offering.
Still, “TikTok already has many building blocks in place,” he says. “The company has brought in a new CEO and head of North America marketing and committed to hiring 10,000 employees in the U.S. over the next 3 years.”
Concludes Weiss: “The basics are potentially in place, in our view ...with the key from here coming back to Microsoft’s execution.”
Microsoft stock was down 0.3% to $212.74 on Wednesday afternoon.
Write to Eric J. Savitz at eric.savitz@barrons.com
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August 06, 2020 at 01:40AM
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TikTok Is a Good Fit With Microsoft, Morgan Stanley Analyst Says - Barron's
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